Topic 9 - Non-Current Assets

Question 1

What is PPE?

Answer 1

physical assets used in the business to provide future economic benefits for a number of years.

Question 2

What does AASB 116/IAS 16 say regarding PPE?

Answer 2

economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life.

This decline is recognised as depreciation expense in the Statement of Profit or Loss.

Question 3

What are the two classes of PPE assets?

Answer 3

• Property:
  includes land and buildings.
• Plant and Equipment:
  includes computers, office furniture, cash registers, factory machinery, motor vehicles.

Question 4

How are PPE assets initially recorded?

Answer 4

at cost in accordance with AASB 116, para 6 as: The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire the asset.

Question 5

What is fair value?

Answer 5

The amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s-length transaction.

Question 6

What is the cost of an asset?

Answer 6

• Consists of the fair value of all expenditure necessary to acquire the asset and make it ready for use:
  e. g. purchase price, freight costs paid, installation costs (capital expenses).

Excludes non-capital expenditures which are expensed immediately.

Question 7

What does the cost of property (land) include?

Answer 7

• purchase price
• settlement costs (e.g. solicitor’s fees)
• stamp duty
• accrued property taxes assumed by purchaser.

Question 8

What does the cost of plant and equipment include?

Answer 8

• purchase price
• freight charges
• insurance during transit
• installation costs.

Question 9

What is depreciation?

Answer 9

The process of allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner.

Question 10

What is the carrying amount (written down value/book value)?

Answer 10

Cost less accumulated depreciation.

Question 11

What are the four factors that contribute to the decline in value of a depreciable asset?

Answer 11

• Usage of the asset.
• Wear and tear through physical use of the asset.
• Technical and commercial obsolescence.
• Legal life.

Question 12

What are the factors in calculating depreciation?

Answer 12

• Cost: all expenditures necessary to acquire the asset and make it ready for intended use.
• Useful life: estimate of the expected life based on intended use, need for repair, vulnerability to obsolescence and legal life.
• Residual value: estimate of the asset’s value at the end of its useful life.
• Date of Purchase: if the asset is purchased during a financial year, depreciation is pro-rated (based on the number of days from the date the asset was acquired to the end of the financial year). For BSB110, a calculation with the number of months divided by 12 will suffice.*

Question 13

What are the depreciation methods?

Answer 13

• Straight Line
• Diminishing Balance
• Units of Production

Question 14

What is straight line?

Answer 14

Spreads cost of asset evenly over life.

Question 15

What is diminishing balance?

Answer 15

An accelerated depreciation method where more depreciation is allocated to earlier years of asset’s life and less to later years of asset’s life.

Question 16

What is units of production?

Answer 16

Applies cost to how much asset is used each year (where possible to track this data).

Question 17

How is straight line calculated?

Answer 17

Depreciation expense same each year as benefits are consumed at same rate each year.

Calculation for annual charge:
= cost of asset – residual value (depreciable amount) divided by useful life of the asset

or

= (cost – residual value) x (1 / useful life of the asset)

Question 18

How is diminishing balance calculated?

Answer 18

Yr 1 onwards: Carrying cost x DB rate

Final year: Carrying cost - Residual value

Question 19

How is units of production calculated?

Answer 19

Useful life is expressed in terms of total units of production or use expected from the asset.

Calculation of depreciation cost per unit:
= depreciable cost of asset (cost – residual value) divided by useful life of the asset

Depreciation expense calculation:
= depreciation cost per unit x yearly units of production

Question 20

What are the two types of subsequent expenditure on PPE?

Answer 20

During the useful life of an asset, a firm may incur costs for:

• Ordinary repairs:
  Expenses in maintaining operating efficiency of the asset.
  Expensed in Statement of Profit or Loss.
• Additions and improvements:
  Costs incurred to increase operating efficiency
  Expenditure capitalised (added to the asset) and depreciated over asset’s remaining useful life.

Question 21

What are intangible assets?

Answer 21

Non-monetary assets that have no physical substance.

Examples include:
Patents (e.g. Apple iPod)
Franchises (e.g. Domino’s Pizza)
Trademarks (e.g. swoosh of Nike).

Question 22

What are the two categories of intangible assets?

Answer 22

• Unidentifiable:
  Cannot be separated from the entity itself.
  Collectively referred to as goodwill.
• Identifiable:
  Must be capable of being separated or divided from an entity (whether sold, licensed, rented or exchanged) or must arise from contractual or other legal rights.

Question 23

When is goodwill recognised?

Answer 23

Goodwill is permitted to be recognised for accounting purposes only when it has been externally acquired and not when it has been internally generated

Question 24

When is an intangible asset identifiable?

Answer 24

A specific value can be placed on each individual asset, and they can be separately identified and sold.
For example, brand names, trademarks, research and development, patents, licences, mastheads and copyrights

May be internally generated (developed within the organisation) OR acquired for a cost (from an external party).

Question 25

What are the five types of Identifiable Intangible Assets?

Answer 25

• Patents:
  Exclusive right granted by IP Australia enabling recipient to manufacture, sell or otherwise control an invention.
• Research and development costs:
  Expenditures that may lead to patents, copyrights, new processes and new products.
• Copyright:
  Gives the owner exclusive right to reproduce and sell an artistic or published work.
• Trademarks and brand names:
  Words, phrases, jingles or symbols that distinguish or identify a particular business or product.
• Franchises and licences:
  A contractual arrangement under the franchisee is granted certain rights.

Question 26

How are identifiable intangible assets disclosed and recognised?

Answer 26

Intangible assets, as a category, must be separately disclosed in the Statement of Financial Position.

Recognised if future economic benefits from the asset are probable AND the cost of the asset can be measured reliably.

Question 27

How are acquired identifiable intangible assets treated?

Answer 27

Recorded at cost, including other directly attributable costs.

Question 28

How are internally generated identifiable intangible assets treated?

Answer 28

• Difficult to determine if there will be future economic benefits and can the cost be determined reliably.
• Certain internally generated intangible assets are not to be carried forward as assets e.g. internally generated brands, mastheads, publishing titles, customer lists.

Question 29

What impact do internally generated identifiable intangible assets have on the financial statements?

Answer 29

• Relevant Information.
• One way to assess this is to look at how the share market reacts to information about these intangible assets.
• Unique opportunity to do this when Australia adopted IFRS and intangible assets had to be taken off the Statement of Financial Position

Question 30

What is amortisation?

Answer 30

• Amortisation is the term used to describe the allocation of the cost of an intangible asset to expense.
• An intangible asset is expensed through amortisation, the systematic reduction of the asset’s carrying amount on the Statement of Financial Position.
• Amortisation applies to intangible assets like depreciation applies to tangible non-current assets, and is calculated over the asset’s estimated useful life.
• Tangible assets are assumed to have a limited life and thus need to be amortised.
• Patents are amortised over legal or useful life, whichever is shorter.